The Demise of Disclosure-Only Settlements? The Court of Chancery Outlines a New Regime. -

In a recent opinion, Chancellor Bouchard of the Delaware Court of Chancery reiterated the Court of Chancery’s belief that settlements of M&A litigation where the target company agrees to issue supplemental public disclosures in exchange for a global release of all claims relating to the transaction “rarely yield genuine benefits for stockholders and threaten the loss of potentially valuable claims that have not been investigated with rigor” and that, going forward, the Court will be “vigilant in scrutinizing the ‘give’ and the ‘get’ of such settlements to ensure they are genuinely fair and reasonable.”

Fourth Quarter 2015
The Ropes Recap
Mergers & Acquisition Law News
A quarterly recap of mergers and acquisition law news from the M&A team at Ropes & Gray
LLP.
Contents
News from the Courts ..................................................................................................................... 2
The Demise of Disclosure-Only Settlements? The Court of Chancery Outlines a New
Regime. ....................................................................................................................................... 2
Delaware Supreme Court Upholds Court of Chancery Rulings in the Rural/Metro Case.......... 3
Court of Chancery Reverses Finding of Financial Advisor Aiding and Abetting Liability for
Lack of an Underlying Breach .................................................................................................... 5
Hostile Bid Prevented by Confidentiality Agreement ................................................................ 6
Delaware Court of Chancery Invalidates Charter & Bylaw Provisions Allowing Only “For
Cause” Director Removal Where Board Is Unclassified ............................................................ 8
Oregon Supreme Court Enforces Delaware Exclusive Forum Selection Bylaw ........................ 9
Delaware Supreme Court Upholds Award of Expectation Damages in Breach of Contract
Claim ......................................................................................................................................... 10
Delaware Court of Chancery Opinion Provides Guidance on the Interpretation of Contractual
Provisions Relating to Fraud-Based Claims ............................................................................. 11
Delaware Supreme Court Draws Inference that Controller’s Long-Term Friend Is Not
Independent ............................................................................................................................... 13
Delaware Court of Chancery Binds Investor to Contractually Mandated Fair Value
Assessment Determination........................................................................................................ 13
Contributors .................................................................................................................................. 15
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News from the Courts
The Demise of Disclosure-Only Settlements? The Court of Chancery Outlines a New
Regime.
In a recent opinion, Chancellor Bouchard of the Delaware Court of Chancery reiterated the Court
of Chancery’s belief that settlements of M&A litigation where the target company agrees to issue
supplemental public disclosures in exchange for a global release of all claims relating to the
transaction “rarely yield genuine benefits for stockholders and threaten the loss of potentially
valuable claims that have not been investigated with rigor” and that, going forward, the Court
will be “vigilant in scrutinizing the ‘give’ and the ‘get’ of such settlements to ensure they are
genuinely fair and reasonable.”
It is well-recognized that, for many years, nearly all public company M&A transactions
precipitated litigation. Many of those actions were settled when the target company agreed to
supplement its public disclosures concerning the transaction to add technical information that
could potentially be helpful to stockholders in determining how to vote on the transaction. In
exchange for issuing those supplemental disclosures, the stockholder plaintiffs would grant the
defendants broad releases of all claims that were or could have been filed in connection with the
transaction – including claims unrelated to the adequacy of the disclosures at issue in the case.
The plaintiffs’ counsel would then seek a fee for having conferred a benefit to the company’s
stockholders. Academics, practitioners, and even certain courts denounced these “merger tax”
lawsuits.
However, in recent decisions, the Court of Chancery has expressed reluctance to approve
disclosure settlements in transactional litigation. Here, Chancellor Bouchard went further and
rejected a proposed disclosure-only settlement of stockholder litigation challenging the
acquisition of Trulia, Inc. by Zillow, Inc. In so doing, Chancellor Bouchard held that the
proposed settlement terms, which involved immaterial supplemental disclosures concerning the
work performed by Trulia’s financial advisor, did not provide Trulia’s stockholders with
adequate consideration for the released claims. Chancellor Bouchard also held that, going
forward, disclosure claims should be raised either in a preliminary injunction motion or through
a mootness application for attorneys’ fees if a company voluntarily moots a stockholder
plaintiff’s disclosure claim by disclosing the relevant information, each of which procedural
vehicles would result in the parties to litigation advocating in an adversarial context the true
value of the supplemental discloses.
This opinion, particularly following the Court’s prior rulings concerning disclosure settlements,
likely signals the end of “disclosure only” settlements, which may have a material impact on the
number of stockholder lawsuits filed in connection with normal course M&A transactions.
Indeed, it has been publicly reported that in the fourth quarter of 2015 after the Court of
Chancery has become increasingly hostile to unremarkable disclosure-only settlements,
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stockholder lawsuits were filed in connection with only 21.4% of public company transactions –
far lower than the 90% and more that had become the norm.
(In re Trulia, Inc. Stockholder Litigation, C.A. No. 10020-CB (Del. Ch. Jan. 22, 2016))
Delaware Supreme Court Upholds Court of Chancery Rulings in the Rural/Metro Case
The Ropes Recap for the First Quarter of 2014 reported on the Delaware Court of Chancery’s
March 2014 opinion in In Re Rural Metro Corporation Stockholders Litigation, in which the
Court of Chancery held that Rural/Metro’s financial adviser, RBC, was liable to a class of
Rural/Metro stockholders for aiding and abetting a breach of fiduciary duty by Rural/Metro
board of directors in connection with the acquisition of Rural/Metro by Warburg Pincus.
Additionally, the Ropes Recap for the Third Quarter of 2014 reported that the Court of Chancery
had awarded $75.8 million in damages to the class. RBC appealed these rulings to the Delaware
Supreme Court and, on November 30, 2015, the Supreme Court issued its ruling upholding the
Court of Chancery’s decisions.
The Supreme Court found that the Court of Chancery’s factual findings were adequately
supported by the trial record. Specifically, the Court of Chancery had found that Rural/Metro
had commenced a sales process without authorization from the full board of directors and that
the sales process was shaped by RBC in a manner designed to benefit RBC by creating potential
opportunities for RBC both to participate in the financing of a contemporaneous acquisition of
EMS, a Rural/Metro competitor, and to provide financing to Warburg Pincus, the ultimate
acquirer of Rural/Metro.
The Supreme Court also upheld several key legal rulings made by the Court of Chancery:
• Application of Revlon scrutiny. RBC argued that the Court of Chancery erred in applying
Revlon’s enhanced scrutiny test to the entire Rural/Metro sale process (including the
unauthorized commencement of the sale process). RBC argued such scrutiny should
apply only to the board’s decision to select Warburg Pincus as the winning bidder. The
Supreme Court rejected this argument, finding that a Special Committee had initiated an
active bidding process to sell the Company months before the final board approval, and
the board subsequently ratified the Special Committee’s actions. Moreover, the Supreme
Court noted that delaying the application of Revlon to the endpoint of a sale process –
when the final decision was made to sell the company -- would potentially incentivize
boards to avoid active engagement in a transaction until the end of a sale process. Finally,
the Supreme Court noted that the key flaws in the sale process occurred during the period
between the initiation of that process by the Special Committee and board approval of the
transaction, and to find that Revlon was not applicable during this period would
undermine the Revlon inquiry, which required the court to “examine whether a board’s
overall course of action was reasonable.”
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• Reasonableness of Board Conduct. Applying the Revlon standard, the Supreme Court
affirmed the Court of Chancery’s finding that the board’s conduct fell outside of the
range of reasonableness required by Revlon in the context of a sale of the company. The
Supreme Court found that RBC had a conflict of interest arising from designing the sale
process to enable it to seek to finance the acquisition of EMS and then, later, Warburg
Pincus, the ultimate acquirer of Rural/Metro, which the Court of Chancery found were
not fully disclosed to the board. The Supreme Court noted that, although a board can
consent to such conflicts, “directors need to be active and reasonably informed when
overseeing the sale process, including identifying and responding to actual or potential
conflicts of interest”. The failure of the board to manage such conflicts, combined with
their failure to be adequately informed as to the Company’s value (having received a
valuation report from RBC less than two hours before the meeting at which the
transaction was approved) led the Supreme Court to affirm the Court of Chancery’s
finding that the board breached its fiduciary duties.
• Disclosure Failures. The Supreme Court also upheld the Court of Chancery’s findings
that the Rural/Metro board failed to satisfy its duty of disclosure to the Company’s
stockholders. Of particular note was the Court’s finding that the proxy statement failed
to fully disclose how RBC intended to use the Rural/Metro sale process to obtain fees for
financing activities (both in connection with a contemporaneous transaction involving a
competitor of the Company, and by providing financing to Warburg Pincus). The Court
dismissed as inadequate a generic disclosure in the proxy statement that RBC had the
right to offer staple financing in light of, among other things, RBC’s efforts to obtain a
financing role for Warburg Pincus, especially towards the end of the sale process.
• Aider and abettor liability. The Supreme Court also affirmed the Court of Chancery’s
holding that RBC was liable as an aider and abettor of the board’s fiduciary breaches,
emphasizing in particular RBC’s role in intentionally misleading the board and in
creating an “informational vacuum” that caused the board to breach its fiduciary duties.
In so finding, the Court rejected arguments that attaching aider and abettor liability to a
board’s unintentional breach of duty would create an imbalance of responsibilities to the
detriment of the non-fiduciary, noting that aider and abettor liability requires scienter of
the aider and abettor, which makes such liability difficult to prove.
Importantly for financial advisors, the Supreme Court rejected the Court of Chancery’s view that
financial advisors function as “gatekeepers” in M&A transactions. Instead, the Supreme Court
noted that the services provided by a financial advisor are primarily contractual in nature and can
vary from one transaction to another, and that it is for a board to determine, in negotiation with
the financial advisor, the scope and terms of the financial advisor’s engagement. According to
the Supreme Court, “[t]he banker is under an obligation not to act in a manner that is contrary to
the interests of the board of directors, thereby undermining the very advice that it knows the
directors will be relying upon in their decision making processes.” As a result, it is not the case
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that any failure by a financial advisor to prevent directors from breaching their duty of care gives
rise to an aiding and abetting claim against the advisor.
(RBC Capital Markets, LLC v. Joanna Jervis, No. 140, 2015 (Del. 2015))
Court of Chancery Reverses Finding of Financial Advisor Aiding and Abetting Liability
for Lack of an Underlying Breach
On October 1, 2015, in In re Zale Corporation Stockholders Litigation, the Delaware Court of
Chancery refused to dismiss a claim against Zale Corporation’s financial advisor asserting that
the advisor had aided and abetted an alleged breach of the duty of care by Zale board. However,
following the Delaware Supreme Court’s decision in Corwin v. KKR Financial Holdings, Inc.,
which we discussed in the third quarter of 2015, and which held that a transaction approved by
uncoerced and fully-informed shareholder results in business judgment rule review, the Court
reversed its earlier decision and dismissed the claim against the advisor, concluding that the
Court had incorrectly applied the Revlon enhanced scrutiny standard of review in the initial
decision, rather than the business judgment rule standard of review mandated by the KKR
Financial decision.
The plaintiffs’ complaint alleged that Zale’s directors breached their duty of care by retaining the
advisor in connection with Zale’s sale to Signet Jewelers without conducting an adequate
investigation into its potential conflicts, and further alleged that the advisor had aided and
abetted those breaches. The Zale board had engaged the advisor after the advisor had represented
that it had no conflicts and a limited relationship with Signet. However, the advisor had received
$2 million in fees from Signet in the prior two years and a managing partner on the Zale
engagement had made a presentation to Signet concerning a possible acquisition of Zale—
including a maximum price that Signet should be willing to pay in such a transaction—shortly
before being engaged by Zale. The Zale board did not learn about that presentation until after the
merger agreement was signed.
The Court of Chancery initially determined that Revlon was the appropriate standard of review
under which to evaluate the plaintiffs’ claims against Zale’s directors. Under a Revlon analysis,
the Court found it reasonably conceivable that the Zale directors’ reliance on the advisor’s
representations about its relationship with Signet without further investigation “could constitute a
breach of their duty of care in this Revlon context.” The Court stated that board members have a
duty to detect a preexisting conflict when engaging a financial advisor, which it could satisfy by
asking probing questions about prior relationships and negotiating for representations and
warranties in the engagement letter. The Court further determined that it was reasonably
conceivable that the advisor’s alleged failure to disclose its presentation to Signet, where it
proposed making a bid to acquire Zale for a purchase price in the range of $17-$21 per Zale
share, adversely impacted the advisor’s and, consequently, the Board’s ability to seek a higher
per share price.
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The Court ultimately determined that the exculpatory provision in Zale’s certificate of
incorporation shielded its directors from monetary liability for any breach of their duty of care;
however, the Court held that the plaintiffs had adequately stated a claim against the advisor for
aiding and abetting those breaches.
Immediately following the Delaware Supreme Court’s ruling in KKR Financial, the advisor
moved for reconsideration of the Court of Chancery’s decision, claiming that, consistent with
KKR Financial, the Court should have applied the business judgment standard of review rather
than Revlon enhanced scrutiny when determining whether the Zale directors had breached their
duty of care.
On reconsideration, the Court determined that, in light of KKR Financial, the business judgment
rule was the appropriate standard of review because a majority of Zale’s disinterested
stockholders had approved the merger in a fully informed vote.
The Court concluded that “when reviewing a board of directors’ actions during a merger process
after the merger has been approved by a majority of disinterested stockholders in a fully
informed vote, the standard for finding a breach of the duty of care under [the business judgment
rule] is gross negligence.” The Court then applied the gross negligence standard to the
allegations presented in the complaint and determined that it was not reasonably conceivable that
the Zale directors breached their duty of care by acting in a grossly negligent manner with
respect to their engagement of advisor. With “no basis for a predicate fiduciary duty breach,” the
court held that the plaintiffs had not adequately pled that the advisor had any breach by the Zale
directors.
(In re Zale Corporation Stockholders Litigation, C.A. No. 9388-VCP (Del. Ch. Oct. 29, 2015)).
Hostile Bid Prevented by Confidentiality Agreement
On November 18, the Superior Court of California in Depomed Inc., v. Horizon Pharma, PLC,
issued a preliminary injunction prohibiting Horizon Pharma, PLC from pursing its hostile bid to
acquire Depomed, Inc.
By way of background, Horizon and Depomed had both participated in an auction process during
2014-2015 to acquire the rights to a pain relief drug called Nucynta, which was at the time
owned by Janssen (a subsidiary of Johnson & Johnson). Depomed emerged from the bidding as
the winner and acquired the rights to Nucynta from Janssen in April 2015. Prior to such auction
process, Horizon and Janssen had entered into a mutual confidentiality agreement regarding “a
contemplated co-promotion of products”, with Janssen to promote Horizon’s drug Duexis and
Horizon to promote Nucynta. The confidentiality agreement protected confidential information
regarding “a potential commercial business arrangement, specifically a co-promotion
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arrangement whereby HORIZON would co-promote JANSSEN’s NUCYNTA® drug product in
the United States.” Janssen ultimately elected not to pursue that co-promotion and notified
Horizon of such decision in early 2014. In connection with the auction process, Horizon and
Janssen did not enter into a new confidentiality agreement. Although Horizon suggested to
Janssen that the terms of the confidentiality agreement be amended to specifically address the
new auction process, no amendment was ever formally made and the parties did not enter into a
separate confidentiality agreement. However, Depomed submitted evidence that subsequent
correspondence between Horizon and Janssen indicated that the two intended that the
confidentiality agreement would nonetheless apply to the auction process.
In July 2015, Horizon launched a hostile bid to acquire Depomed. Depomed sought injunctive
relief and claimed that Horizon was improperly using confidential information it obtained from
Janssen when it participated in the auction for Nucynta. Although Horizon claimed that (i)
Horizon’s obligations of confidentiality were limited to discussions related to the potential co-
promotion transaction, (ii) it never breached the agreement in its pursuit of the hostile bid, and
(iii) Depomed lacked standing because it had never acquired Janssen’s rights under the
confidentiality agreement since the confidentiality was not specifically identified as a transferred
asset under the purchase agreement, the Court found Depomed’s claims were likely to prevail
and it granted the preliminary injunction. Horizon withdrew its $1 billion hostile bid following
the ruling.
This decision bears great resemblance to the 2012 Martin Marietta decision (Martin Marietta Inc.
v. Vulcan Materials Co., 56 A.3d 1072 (Del Ch. 2012)) where the Delaware Court of Chancery
blocked a hostile bid because of a violation of a confidentiality agreement, and provides a couple
of important reminders for a prospective acquiror of a business:
• It is important for a company to carefully monitor the confidentiality agreements
that it enters into in the course of its business, especially those relating to the
evaluation of potential acquisitions and other business ventures. In particular,
a company should keep track of the counterparties to which it owes obligations
regarding confidentiality, as well as the use restrictions for which it may use the
confidential information it receives.
• In anticipation of the potential need to assign rights under confidentiality
agreements to a future acquiror of all or a part of its business, a potential seller
should consider including in the ordinary course a provision in its confidentiality
agreements expressly providing for the assignability, in whole or in part, of such
seller’s rights under the confidentiality agreement to the purchaser of the assets to
which such agreement relates, without the need for obtaining the consent of the
other party to the confidentiality agreement. In doing so, consider the scope of
information to be disclosed as part of the sale process and whether any such
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information relates in whole or in part to retained assets to ensure that rights are
not inadvertently assigned with respect to any retained assets in a sale of only a
portion of the seller’s business.
(Depomed Inc., v. Horizon Pharma, PLC, No. 1:15-cv-283834 (Cal. Super. Ct. Nov. 18, 2015)).
Delaware Court of Chancery Invalidates Charter & Bylaw Provisions Allowing Only “For
Cause” Director Removal Where Board Is Unclassified
In December 2015, the Delaware Court of Chancery invalidated provisions of VAALCO Energy,
Inc.’s corporate charter and bylaws that purported to limit the removal of VAALCO directors to
“for cause” removals even though the VAALCO board was not classified (i.e., the VAALCO
directors are elected on an annual basis). Vice Chancellor Laster held that those provisions
violated Section 141(k) of the Delaware General Corporation Law, which requires that any
director may be removed “with or without cause” by a majority vote of the corporation’s
stockholders, except where the board is classified or the directors are elected by cumulative
voting.
Here, the “for cause” removal provisions in VAALCO’s corporate charter and bylaws were
adopted at a time when its board was classified. When stockholders voted to de-classify the
board in 2009, there was no corresponding amendment to the company’s organizational
documents. Stockholders ultimately challenged the validity of those provisions. VAALCO and
its directors moved to dismiss those claims, arguing that “numerous” (at least 175) other
corporations had similar provisions. Vice Chancellor Laster rejected that argument, noting that
those corporations constituted less than 5 percent of public companies, and stating that an “all the
other kids are doing it” argument did not survive judicial scrutiny. The Court also rejected
VAALCO’s argument that Section 141(d) of the DGCL, which states that a board may “be
divided into 1, 2 or 3 classes,” creates the concept of a single-class classified board. The Court
therefore rejected VAALCO’s arguments, and entered a declaratory judgment holding the
provisions of the corporation’s charter and bylaws which permit only “for cause” removals to be
invalid.
This ruling shows that the directors of Delaware corporations that have declassified their boards
should not rely on any “for cause only” restrictions to the removal of directors as part of its
defensive profile, as the Delaware Courts will not respect such restriction.
(In re VAALCO Energy, Inc. Stockholder Litigation, C.A. No. 11775-VCL (Del. Ch. Dec. 21,
2015))
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Oregon Supreme Court Enforces Delaware Exclusive Forum Selection Bylaw
In recent years, many courts across the country—including courts in California, Illinois,
Louisiana, New York, and Texas—have followed the lead of the Delaware Court of Chancery
and held that exclusive forum selection bylaws are valid and enforceable. One notable exception
to that trend was an August 2014 opinion from an Oregon trial court (which was reported on in
the third quarter 2014 edition of the Ropes Recap), which refused to enforce a Delaware
exclusive forum selection bylaw that would have barred an Oregon litigation challenging a
merger between TriQuint Semiconductor, Inc. and RF Micro Devices, Inc. In a recent opinion,
the Oregon Supreme Court reversed that trial court ruling, holding that TriQuint’s exclusive
forum selection bylaw was valid and enforceable, and compelled stockholders challenging that
transaction to pursue their claims in Delaware.
In reversing the trial court’s ruling, the Oregon Supreme Court held that the TriQuint exclusive
forum selection bylaw was valid under both Delaware and Oregon law. The Court first held that,
as stated by the Delaware Court of Chancery in its opinions in Chevron and First Citizens,
Delaware corporations are generally permitted to adopt exclusive forum selection bylaws (as
further memorialized in DGCL 115). The court proceeded to hold that the forum selection bylaw
adopted by TriQuint was enforceable, even though it was adopted two days prior to the public
announcement of the TriQuint/RF merger and the plaintiffs had claimed that it was enacted for
an improper purpose. In so holding, the Supreme Court rejected the trial court’s conclusion that
the bylaw was invalid because the TriQuint stockholders did not have an adequate opportunity to
reverse the bylaw by vote. The court also rejected the trial court’s reliance on the 1971 Delaware
Supreme Court decision in Schnell v. Chris-Craft Industries, Inc., holding that the TriQuint
bylaw did not prevent TriQuint’s stockholders from challenging the merger, but only dictated the
forum in which they could do so. Here, the Supreme Court noted that exclusive forum selection
bylaws benefit corporations and their stockholders by eliminating the costs incurred by “a
multiplicity of suits in various states,” and that the plaintiffs would not be harmed by litigating
their claims in Delaware.
The Supreme Court also held that TriQuint’s forum selection bylaw was valid under Oregon law,
stating that comity and respect for Delaware corporate law mandated deference to Delaware law
absent a compelling public policy to the contrary. There, the Court went on to state that it could
“discern no public policy sufficient to overcome” comity-driven deference to the “internal
relationship” between TriQuint and its stockholders and their concern of subjecting a Delaware
corporation to “inconsistent regulation in different forums.”
This opinion warrants mention because it overturned one of the few cases upon which
stockholder plaintiffs challenging exclusive forum selection bylaws could rely, and provides yet
another case permitting the adoption and enforcement of such bylaws. The opinion also validated
an exclusive forum selection bylaw adopted a mere two days prior to the public announcement of
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a change in control transaction, providing support for the argument that such bylaws do not need
to be enacted on a “clear day” in order to be enforceable.
(Roberts v. TriQuint Semiconductor, Inc., 358 Or. 413 (Or. 2015))
Delaware Supreme Court Upholds Award of Expectation Damages in Breach of Contract
Claim
In SIGA Technologies, Inc. v. PharmAthene, Inc., the Delaware Supreme Court upheld a $113
million judgment against SIGA Technologies Inc. over a failed merger and licensing agreement,
in an opinion that provides useful guidance to practitioners as to the recovery of expectation
damages.
This decision was the second time the Supreme Court reviewed the case, having previously
remanded the case back to the Court of Chancery for further review of the appropriate
damages. The case arose from the failed 2006 merger between SIGA Technologies and
PharmAthene. The merger agreement provided that if the merger failed to close, the parties
would negotiate in good faith a license agreement consistent with a non-binding term sheet
previously agreed upon by the parties for the licensing of ST-246, a drug owned by SIGA
Technologies for the treatment of smallpox. PharmAthene was unable to negotiate a license
agreement with SIGA and sued SIGA for breaching its obligation to negotiate the license
agreement in good faith consistent with the term sheet. The Court of Chancery initially
determined that SIGA did not negotiate in good faith and breached its agreement to do so, but it
was unable to award expectation damages because such an amount was “speculative and too
uncertain, contingent, and conjectural” and it awarded PharmAthene an equitable payment
stream based on SIGA’s future profits. On review the Supreme Court looked to New York law
for guidance and determined that the agreement at issue was a “Type II” agreement (i.e.
“preliminary agreements [where the parties] ‘agree on certain major terms, but leave other terms
open for further negotiation’”) which entitled PharmAthene to recover expectation damages. The
Supreme Court remanded the case back to the Court of Chancery for “reconsideration of the
damages.” On remand the Court of Chancery determined that PharmAthene was entitled to
$113 million in expectation damages, and SIGA appealed the decision.
The Supreme Court upheld the Court of Chancery’s determination of the damages and held that
the Court of Chancery’s de novo review of damages was done in accordance with the Supreme
Court’s instructions from its earlier decision. The Court relied heavily on the fact that SIGA had,
by its breach of the agreement, caused much of the uncertainty as to proper amount of damages.
The Court stated that the standard for evaluating expectation damages is based upon “the
reasonable expectations of the parties ex ante” and is measured by “the amount of money that
would put the promisee in the same position as if the promisor had performed the
contract.” Although the injured party must prove that it was actually damaged with reasonable
certainty, the amount of damages can be estimated. The Court stated that “the injured party need
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not establish the amount of damages with precise certainty ‘where the wrong has been proven
and injury established.’” According to the Second Restatement of Contracts (quoted in the
Court’s opinion), “where the existence of damages is certain, and the only uncertainty relates to
the amount … the burden of uncertainty as to the amount of damages falls upon the wrongdoer.”
The Supreme Court noted that the Court of Chancery was correct in resolving uncertainties about
costs against SIGA when the uncertainties would have been avoided if SIGA had negotiated the
license agreement in good faith. The willfulness of the breaching party “is a relevant factor in
deciding the quantum of proof required to establish the damages amount” and the Court of
Chancery’s use of willfulness in deciding to require a lesser degree of certainty was appropriate.
A court may consider post-breach evidence to confirm its conclusions as to the parties’
reasonable expectations at the time of breach.
It should be noted that the Supreme Court’s decision was a rare non-unanimous decision, and
Justice Karen L. Valihura authored a lengthy dissent in which she disagreed with many of the
majority’s conclusions and pointed out that the majority’s decision would move Delaware out of
alignment with other major commercial jurisdictions such as California and New York by
eroding the requirement that damages be proved with reasonable certainty.
(Siga Technologies, Inc. v. PharmAthene, Inc., Del. Supr., No. 20, 2015 (December 28, 2015)).
Delaware Court of Chancery Opinion Provides Guidance on the Interpretation of
Contractual Provisions Relating to Fraud-Based Claims
On November 24, 2015, Vice Chancellor Laster issued an informative opinion on a motion to
dismiss allegations of fraud under Delaware law in Prairie Capital vs. Incline Equity
Partners. The case involved a sponsor to sponsor sale of Prairie Capital’s portfolio company
Double E Company to Incline Equity Partners. Incline alleged that the CEO and CFO of the
company (with Prairie Capital’s knowledge and approval) committed fraud by fabricating sales
to achieve certain financial targets that Incline required to close the acquisition. Incline also
made an indemnification claim and sought to recover $500,000 held in escrow for
indemnification obligations. Although Vice Chancellor Laster’s opinion was only made on a
motion to dismiss, the opinion provides useful guidance for drafting and negotiating fraud
provisions and serves as an important reminder of the importance for buyers and sellers to
clearly define the scope of potential fraud-based claims.
The key takeaways from the opinion are as follows:
• Extra-contractual Representations. There are no magic words when it comes to clearly
establishing non-reliance. The purchase agreement had an exclusive representations and
warranties clause (stating that the buyer disclaimed any representations and warranties
outside of the agreement) and an integration clause, but did not have a non-reliance
clause (i.e. that the buyer has not relied on any representations outside of the
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agreement). Vice Chancellor Laster found the combination of the exclusivity and
integration clauses created a “clear anti-reliance clause” (even in the absence of a non-
reliance clause) and he noted that “[t]ransaction planners can limit their risk by using
tested formulations, but they do not need to employ magic words.” As a result of
determining that an anti-reliance clause existed, Vice Chancellor Laster dismissed any
extra-contractual claims based on fraudulent misrepresentations.
• Extra-contractual Omissions. Exclusive representation provisions could bar claims for
fraudulent omissions or concealments beyond the four corners of the contract. Incline
argued that the exclusive representation provision should not bar claims for fraudulent
omissions or concealments outside of the contract. Vice Chancellor Laster, however,
noting how a misrepresentation claim can easily be flipped into an omission claim, held
that a valid disclaimer of extra-contractual representations will also bar claims of extra-
contractual omissions. Vice Chancellor Laster noted that this holding may be in
disagreement with TransDigm Inc. v. Alcoa Global Fasteners, Inc. (Del. Ch. May 29,
2013) “[t]o the extent that Transdigm suggests that an agreement must use a magic word
like ‘omissions’.” Given that this may not be settled law, practitioners should consider
still using the word “omissions” or other language that clearly indicates that the seller is
not making “any representation as to the accuracy or completeness” of the information
provided.
• Exclusive Remedies. Courts will likely read provisions relating to fraud taken as a
whole. Incline also argued that the exclusion of fraud in the indemnification provisions
exclusive remedies provision should permit it to make an extra-contractual fraud claim.
However, Vice Chancellor Laster determined that the exclusion of fraud meant only that
the indemnification provisions are not the exclusive remedy in respect of fraud, but did
not expand the universe of claims for fraud that can be made – in other words, he found
that fraud claims were preserved, but could only be based on the representations and
warranties in the agreement, because Incline had waived reliance (an essential element of
a fraud claim) on anything outside the agreement.
• Claims Against Non-Parties (Directors, Officers & Controlling Sponsor). D&O and
secondary liability claims with a basis in fraud are possible. Prairie and the officers of
the company argued that they should not be liable because the representations in the
agreement were made by the company and not by the officers or Prairie, but at the motion
to dismiss stage Vice Chancellor Laster rejected this argument and permitted Incline to
continue to pursue (i) the fraud claims against the officers of the company based upon the
company’s representations and warranties because an “officer actively participating in the
fraud cannot escape personal liability on the ground that the officer was acting for the
corporation” and (ii) the secondary liability claims (e.g. aiding and abetting) against
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Prairie due to Prairie's involvement in the sale process and knowledge of the fraudulent
behavior.
As a result of the foregoing, the claims for fraud based on representations and warranties in the
agreement itself and certain contractual claims for indemnification were permitted to proceed
past the motion to dismiss stage of litigation.
(Prairie Capital III, L.P. v. Double E Holding Corp., C.A. No. 10127-VCL (Del. Ch. Nov. 24,
2015)).
Delaware Supreme Court Draws Inference that Controller’s Long-Term Friend Is Not
Independent
In a recent Delaware Supreme Court case, the Court found that, for purposes of demand excusal
in a derivative action, there is a reasonable doubt about the independence of a director who has
been a close personal friend and confidant of the chairman of the board for over 50 years, and
whose job and other sources of income were linked to this friendship. The Supreme Court, in
reversing the Court of Chancery, differentiated this long-standing bond, along with strong
circumstantial evidence that the director’s economic position was based on the friendship, from
the “thin social-circle friendship” found in certain other Delaware cases where directors merely
move in some of the same circles and where courts found that there was no reasonable doubt
about directors’ independence.
This decision shows that the Delaware Courts will continue to contextually analyze
independence – while the fact that a director is an acquaintance of the controller is unlikely to
support an inference that the director is conflicted, a close personal friendship could rebut the
presumption of independence.
(Delaware County Employees Retirement Fund v. Sanchez, C.A. No. 9132-VCG (Del. Ch. Oct. 2,
2015)).
Delaware Court of Chancery Binds Investor to Contractually Mandated Fair Value
Assessment Determination
In a recent opinion, Chancellor Bouchard of the Delaware Court of Chancery held that investors
in an LLC were bound to a valuation made in good faith by a third party that the investors and
the LLC had agreed would determine the value of the investors’ shares.
In this case, two investors acquired shares in PECO Logistics, LLC. The investors acquired those
units subject to an LLC agreement that gave them the right to “put” their shares to PECO after
three years of ownership. The agreement further provided that if the investors exercised that put
right, PECO would retain a nationally recognized valuation firm to assess the fair market value
14
of the investors’ shares, and then repurchase those shares at that determined value. The LLC
agreement also provided that PECO and the investors would be bound by the valuation firm’s
determination. The investors exercised their put right, and PECO retained Duff & Phelps to value
the investors’ shares, with no objection from the investors’ board designee. Applying the
valuation methodologies specified in the LLC agreement, Duff & Phelps assessed the total equity
value of the shares to be approximately $93 million. The investors rejected that valuation as too
low, and refused to put their shares back to PECO at that value. PECO then initiated a
declaratory judgment action to force the investors to put their shares at that value.
The investors complained that the Duff & Phelps valuation was conducted improperly. The court
rejected that argument, holding that the court should “defer to the judgment calls Duff & Phelps
had to make to apply the valuation formula in a sensible manner” because the parties had already
agreed that the firm’s determination would be binding without any mechanism for review. In the
absence of a contractual mechanism for review, the court could only focus on whether the
valuation somehow breached the implied covenant of good faith and fair dealing inherent in
every contract governed by Delaware law or was inconsistent with any prescribed valuation
mechanisms and procedures under the agreement. Since Duff & Phelps’ independence was not in
question, and their other complaints with the valuation were critiques of reasonable judgment
calls not inconsistent with the agreement, the Court found that the valuation did not violate the
covenant of good faith and fair dealing.
Ultimately, the court’s opinion underscores the deference that Delaware courts will give to
valuation assessments and other private determinations of this kind where sophisticated parties
have agreed that such determinations will be final and binding on all parties. Absent some
evidence of manipulation or bad faith, the courts will likely hold the parties to the benefit of their
bargain.
(PECO Logistics, LLC v. Walnut Investment Partners, L.P., C.A. NO. 9978-CB (Del. Ch. Dec.
30, 2015))
15
Contributors
Partners:
C. Thomas Brown (New York)
thomas.brown@ropesgray.com
Jason Freedman (San Francisco)
jason.freedman@ropesgray.com
Jane Goldstein (Boston/New York) (co-head of M&A)
jane.goldstein@ropesgray.com
Howard Glazer (San Francisco)
howard.glazer@ropesgray.com
David Hennes (New York)
david.hennes@ropesgray.com
James Lidbury (Hong Kong) (co-head of M&A)
james.lidbury@ropesgray.com
Carl Marcellino (New York) (co-head of M&A)
carl.marcellino@ropesgray.com
Anne Johnson Palmer (San Francisco)
anne.johnsonpalmer@ropesgray.com
Philip Sanderson (London)
philip.sanderson@ropesgray.com
John Sorkin (New York)
john.sorkin@ropesgray.com
Peter Welsh (Boston)
peter.welsh@ropesgray.com
Marko Zatylny (Boston)
marko.zatylny@ropesgray.com
Counsel:
Martin Crisp (New York)
martin.crisp@ropesgray.com
Chief of Legal Knowledge Management:
Patrick Diaz (Boston)
patrick.diaz@ropesgray.com
Associates:
Zachary Blume (Boston)
zachary.blume@ropesgray.com
James Davis (Chicago)
james.davis@ropesgray.com
Jaclyn Ruch (New York)
jaclyn.ruch@ropesgray.com
Hunter Sharp (Chicago)
hunter.sharp@ropesgray.com
Larissa Smith (New York)
larissa.smith@ropesgray.com
Justin Voeks (Chicago)
justin.voeks@ropesgray.com
Professional Support and KM Lawyers:
Fay Anthony (London)
fay.anthony@ropesgray.com
Marc Feldhamer (New York)
marc.feldhamer@ropesgray.com
Marvin Tagaban (New York)
marvin.tagaban@ropesgray.com

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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JD Supra Privacy Policy

Updated: May 25, 2018:

JD Supra is a legal publishing service that connects experts and their content with broader audiences of professionals, journalists and associations.

This Privacy Policy describes how JD Supra, LLC ("JD Supra" or "we," "us," or "our") collects, uses and shares personal data collected from visitors to our website (located at www.jdsupra.com) (our "Website") who view only publicly-available content as well as subscribers to our services (such as our email digests or author tools)(our "Services"). By using our Website and registering for one of our Services, you are agreeing to the terms of this Privacy Policy.

Please note that if you subscribe to one of our Services, you can make choices about how we collect, use and share your information through our Privacy Center under the "My Account" dashboard (available if you are logged into your JD Supra account).

Collection of Information

Registration Information. When you register with JD Supra for our Website and Services, either as an author or as a subscriber, you will be asked to provide identifying information to create your JD Supra account ("Registration Data"), such as your:

Email

First Name

Last Name

Company Name

Company Industry

Title

Country

Other Information: We also collect other information you may voluntarily provide. This may include content you provide for publication. We may also receive your communications with others through our Website and Services (such as contacting an author through our Website) or communications directly with us (such as through email, feedback or other forms or social media). If you are a subscribed user, we will also collect your user preferences, such as the types of articles you would like to read.

Information from third parties (such as, from your employer or LinkedIn): We may also receive information about you from third party sources. For example, your employer may provide your information to us, such as in connection with an article submitted by your employer for publication. If you choose to use LinkedIn to subscribe to our Website and Services, we also collect information related to your LinkedIn account and profile.

Your interactions with our Website and Services: As is true of most websites, we gather certain information automatically. This information includes IP addresses, browser type, Internet service provider (ISP), referring/exit pages, operating system, date/time stamp and clickstream data. We use this information to analyze trends, to administer the Website and our Services, to improve the content and performance of our Website and Services, and to track users' movements around the site. We may also link this automatically-collected data to personal information, for example, to inform authors about who has read their articles. Some of this data is collected through information sent by your web browser. We also use cookies and other tracking technologies to collect this information. To learn more about cookies and other tracking technologies that JD Supra may use on our Website and Services please see our "Cookies Guide" page.

How do we use this information?

We use the information and data we collect principally in order to provide our Website and Services. More specifically, we may use your personal information to:

Operate our Website and Services and publish content;

Distribute content to you in accordance with your preferences as well as to provide other notifications to you (for example, updates about our policies and terms);

Measure readership and usage of the Website and Services;

Communicate with you regarding your questions and requests;

Authenticate users and to provide for the safety and security of our Website and Services;

Conduct research and similar activities to improve our Website and Services; and

Comply with our legal and regulatory responsibilities and to enforce our rights.

How is your information shared?

Content and other public information (such as an author profile) is shared on our Website and Services, including via email digests and social media feeds, and is accessible to the general public.

If you choose to use our Website and Services to communicate directly with a company or individual, such communication may be shared accordingly.

Readership information is provided to publishing law firms and authors of content to give them insight into their readership and to help them to improve their content.

Our Website may offer you the opportunity to share information through our Website, such as through Facebook's "Like" or Twitter's "Tweet" button. We offer this functionality to help generate interest in our Website and content and to permit you to recommend content to your contacts. You should be aware that sharing through such functionality may result in information being collected by the applicable social media network and possibly being made publicly available (for example, through a search engine). Any such information collection would be subject to such third party social media network's privacy policy.

Your information may also be shared to parties who support our business, such as professional advisors as well as web-hosting providers, analytics providers and other information technology providers.

Any court, governmental authority, law enforcement agency or other third party where we believe disclosure is necessary to comply with a legal or regulatory obligation, or otherwise to protect our rights, the rights of any third party or individuals' personal safety, or to detect, prevent, or otherwise address fraud, security or safety issues.

To our affiliated entities and in connection with the sale, assignment or other transfer of our company or our business.

How We Protect Your Information

JD Supra takes reasonable and appropriate precautions to insure that user information is protected from loss, misuse and unauthorized access, disclosure, alteration and destruction. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. You should keep in mind that no Internet transmission is ever 100% secure or error-free. Where you use log-in credentials (usernames, passwords) on our Website, please remember that it is your responsibility to safeguard them. If you believe that your log-in credentials have been compromised, please contact us at privacy@jdsupra.com.

Children's Information

Our Website and Services are not directed at children under the age of 16 and we do not knowingly collect personal information from children under the age of 16 through our Website and/or Services. If you have reason to believe that a child under the age of 16 has provided personal information to us, please contact us, and we will endeavor to delete that information from our databases.

Links to Other Websites

Our Website and Services may contain links to other websites. The operators of such other websites may collect information about you, including through cookies or other technologies. If you are using our Website or Services and click a link to another site, you will leave our Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We are not responsible for the data collection and use practices of such other sites. This Policy applies solely to the information collected in connection with your use of our Website and Services and does not apply to any practices conducted offline or in connection with any other websites.

Information for EU and Swiss Residents

JD Supra's principal place of business is in the United States. By subscribing to our website, you expressly consent to your information being processed in the United States.

Our Legal Basis for Processing: Generally, we rely on our legitimate interests in order to process your personal information. For example, we rely on this legal ground if we use your personal information to manage your Registration Data and administer our relationship with you; to deliver our Website and Services; understand and improve our Website and Services; report reader analytics to our authors; to personalize your experience on our Website and Services; and where necessary to protect or defend our or another's rights or property, or to detect, prevent, or otherwise address fraud, security, safety or privacy issues. Please see Article 6(1)(f) of the E.U. General Data Protection Regulation ("GDPR") In addition, there may be other situations where other grounds for processing may exist, such as where processing is a result of legal requirements (GDPR Article 6(1)(c)) or for reasons of public interest (GDPR Article 6(1)(e)). Please see the "Your Rights" section of this Privacy Policy immediately below for more information about how you may request that we limit or refrain from processing your personal information.

Your Rights

Right of Access/Portability: You can ask to review details about the information we hold about you and how that information has been used and disclosed. Note that we may request to verify your identification before fulfilling your request. You can also request that your personal information is provided to you in a commonly used electronic format so that you can share it with other organizations.

Right to Correct Information: You may ask that we make corrections to any information we hold, if you believe such correction to be necessary.

Right to Restrict Our Processing or Erasure of Information: You also have the right in certain circumstances to ask us to restrict processing of your personal information or to erase your personal information. Where you have consented to our use of your personal information, you can withdraw your consent at any time.

You can make a request to exercise any of these rights by emailing us at privacy@jdsupra.com or by writing to us at:

You can also manage your profile and subscriptions through our Privacy Center under the "My Account" dashboard.

We will make all practical efforts to respect your wishes. There may be times, however, where we are not able to fulfill your request, for example, if applicable law prohibits our compliance. Please note that JD Supra does not use "automatic decision making" or "profiling" as those terms are defined in the GDPR.

Timeframe for retaining your personal information: We will retain your personal information in a form that identifies you only for as long as it serves the purpose(s) for which it was initially collected as stated in this Privacy Policy, or subsequently authorized. We may continue processing your personal information for longer periods, but only for the time and to the extent such processing reasonably serves the purposes of archiving in the public interest, journalism, literature and art, scientific or historical research and statistical analysis, and subject to the protection of this Privacy Policy. For example, if you are an author, your personal information may continue to be published in connection with your article indefinitely. When we have no ongoing legitimate business need to process your personal information, we will either delete or anonymize it, or, if this is not possible (for example, because your personal information has been stored in backup archives), then we will securely store your personal information and isolate it from any further processing until deletion is possible.

Onward Transfer to Third Parties: As noted in the "How We Share Your Data" Section above, JD Supra may share your information with third parties. When JD Supra discloses your personal information to third parties, we have ensured that such third parties have either certified under the EU-U.S. or Swiss Privacy Shield Framework and will process all personal data received from EU member states/Switzerland in reliance on the applicable Privacy Shield Framework or that they have been subjected to strict contractual provisions in their contract with us to guarantee an adequate level of data protection for your data.

California Privacy Rights

Pursuant to Section 1798.83 of the California Civil Code, our customers who are California residents have the right to request certain information regarding our disclosure of personal information to third parties for their direct marketing purposes.

You can make a request for this information by emailing us at privacy@jdsupra.com or by writing to us at:

Some browsers have incorporated a Do Not Track (DNT) feature. These features, when turned on, send a signal that you prefer that the website you are visiting not collect and use data regarding your online searching and browsing activities. As there is not yet a common understanding on how to interpret the DNT signal, we currently do not respond to DNT signals on our site.

Access/Correct/Update/Delete Personal Information

For non-EU/Swiss residents, if you would like to know what personal information we have about you, you can send an e-mail to privacy@jdsupra.com. We will be in contact with you (by mail or otherwise) to verify your identity and provide you the information you request. We will respond within 30 days to your request for access to your personal information. In some cases, we may not be able to remove your personal information, in which case we will let you know if we are unable to do so and why. If you would like to correct or update your personal information, you can manage your profile and subscriptions through our Privacy Center under the "My Account" dashboard. If you would like to delete your account or remove your information from our Website and Services, send an e-mail to privacy@jdsupra.com.

Changes in Our Privacy Policy

We reserve the right to change this Privacy Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our Privacy Policy will become effective upon posting of the revised policy on the Website. By continuing to use our Website and Services following such changes, you will be deemed to have agreed to such changes.

Contacting JD Supra

If you have any questions about this Privacy Policy, the practices of this site, your dealings with our Website or Services, or if you would like to change any of the information you have provided to us, please contact us at: privacy@jdsupra.com.

JD Supra Cookie Guide

As with many websites, JD Supra's website (located at www.jdsupra.com) (our "Website") and our services (such as our email article digests)(our "Services") use a standard technology called a "cookie" and other similar technologies (such as, pixels and web beacons), which are small data files that are transferred to your computer when you use our Website and Services. These technologies automatically identify your browser whenever you interact with our Website and Services.

How We Use Cookies and Other Tracking Technologies

We use cookies and other tracking technologies to:

Improve the user experience on our Website and Services;

Store the authorization token that users receive when they login to the private areas of our Website. This token is specific to a user's login session and requires a valid username and password to obtain. It is required to access the user's profile information, subscriptions, and analytics;

Track anonymous site usage; and

Permit connectivity with social media networks to permit content sharing.

There are different types of cookies and other technologies used our Website, notably:

"Session cookies" - These cookies only last as long as your online session, and disappear from your computer or device when you close your browser (like Internet Explorer, Google Chrome or Safari).

"Persistent cookies" - These cookies stay on your computer or device after your browser has been closed and last for a time specified in the cookie. We use persistent cookies when we need to know who you are for more than one browsing session. For example, we use them to remember your preferences for the next time you visit.

"Web Beacons/Pixels" - Some of our web pages and emails may also contain small electronic images known as web beacons, clear GIFs or single-pixel GIFs. These images are placed on a web page or email and typically work in conjunction with cookies to collect data. We use these images to identify our users and user behavior, such as counting the number of users who have visited a web page or acted upon one of our email digests.

JD Supra Cookies. We place our own cookies on your computer to track certain information about you while you are using our Website and Services. For example, we place a session cookie on your computer each time you visit our Website. We use these cookies to allow you to log-in to your subscriber account. In addition, through these cookies we are able to collect information about how you use the Website, including what browser you may be using, your IP address, and the URL address you came from upon visiting our Website and the URL you next visit (even if those URLs are not on our Website). We also utilize email web beacons to monitor whether our emails are being delivered and read. We also use these tools to help deliver reader analytics to our authors to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

Analytics/Performance Cookies. JD Supra also uses the following analytic tools to help us analyze the performance of our Website and Services as well as how visitors use our Website and Services:

Google Analytics - For more information on Google Analytics cookies, visit www.google.com/policies. To opt-out of being tracked by Google Analytics across all websites visit http://tools.google.com/dlpage/gaoptout. This will allow you to download and install a Google Analytics cookie-free web browser.

Facebook, Twitter and other Social Network Cookies. Our content pages allow you to share content appearing on our Website and Services to your social media accounts through the "Like," "Tweet," or similar buttons displayed on such pages. To accomplish this Service, we embed code that such third party social networks provide and that we do not control. These buttons know that you are logged in to your social network account and therefore such social networks could also know that you are viewing the JD Supra Website.

Controlling and Deleting Cookies

If you would like to change how a browser uses cookies, including blocking or deleting cookies from the JD Supra Website and Services you can do so by changing the settings in your web browser. To control cookies, most browsers allow you to either accept or reject all cookies, only accept certain types of cookies, or prompt you every time a site wishes to save a cookie. It's also easy to delete cookies that are already saved on your device by a browser.

The processes for controlling and deleting cookies vary depending on which browser you use. To find out how to do so with a particular browser, you can use your browser's "Help" function or alternatively, you can visit http://www.aboutcookies.org which explains, step-by-step, how to control and delete cookies in most browsers.

Updates to This Policy

We may update this cookie policy and our Privacy Policy from time-to-time, particularly as technology changes. You can always check this page for the latest version. We may also notify you of changes to our privacy policy by email.

Contacting JD Supra

If you have any questions about how we use cookies and other tracking technologies, please contact us at: privacy@jdsupra.com.

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